Moneyball without the ball

Posts from the ‘Vicor (VICR)’ Category

I wrote a couple of lengthy responses in the comment section that I have reproduced here. One was on RumbleOn (here). The other was about Liqtech (here). I also comment on Smith-Micro and Vicor briefly.

Liqtech

1. Isn’t the installation of scrubbers self-defeating if too many ships continue to use HSFO?

A couple points. First, assuming that there is a point where its self defeating to install scrubbers (which I am going to raise a question about in a second) I believe that its far enough away that if it happens Liqtech will have benefited well beyond what is justified by the current share price. Consider that right now we are talking a couple thousand ships getting scrubbers out of a 70k fleet. And my numbers are assuming Liqtech only gets a fraction of those ships (ie. I don’t have the latest framework agreement modeled in there, I don’t have direct to shipowner sales, no sales from the other 4 scrubber manufacturers they are working with). Second, are we sure it would be self-defeating? Consider this – What are current HSFO to LSFO equivalent spreads (you have to use a gasoil equivalent for LSFO because there isn’t a true LSFO right now) and what would be the payback on scrubbers at those spreads? I was looking at this a month ago and thinking that at current spreads (so right now, with all ships still using HSFO) scrubber payback would still be pretty good. Isn’t this the worst case scenario for spreads after 2020? To put it another way, the reason ships aren’t installing scrubbers right isn’t because spreads aren’t favorable, its because they don’t have to.

2. What is a fair multiple for Liqtech given that their growth is concentrated on the next seven years and will massively flatten or even be negative thereafter?

While it’s hard to predict that far out in the future, there are opportunities that could result in significant earnings even after the retrofit opportunity has passed. First there is the new build opportunity – 60% of new builds are being installed with scrubbers. 1,000-1,500 ships a year get built I believe (I’ve never been able to pin that number down exactly, its always given on a DMT basis, not ship basis) and Liqtech is dealing with 7 of the 10 largest scrubber manufacturers. So the opportunity is quite large.

Second, I think the upside from the ramp could far exceed the current share price on its own. While its tough to project because we don’t know yet whether Liqtech will hold its market share through the build, how many scrubbers will be closed-loop or hybrid, etc, if an optimistic scenario holds then the cash they taken in should exceed the existing share price by quite a bit.

Further off there are other verticals where the exposure from being used in a large number of ships will help give them credibility to expand into – such as scrubbers for power industry, oil and gas flowback filtering, and maybe further inroads into DPFs.

But the main answer i that I think the new build opp is going to be large. The bigger question is what does the regulatory regime look like in 7 years and have even stricter environmental regs come in and how do scrubbers fit into that. And the other obvious big question is whether there are more hiccups in the implementation of the regulations between now and 2020.

3. Will we see lower revenue because the latest framework agreement is for lower ASP systems?

No, I don’t think that’s right. Consider that the new framework agreement is entirely incremental to my model. You can basically add 80-100 units at $230K and 70% margin (they said higher margin and we know existing units at scale are 65% with the Mark 6 design so 70% is my guess). So I think my numbers actually change pretty dramatically for the better with the new agreement. Also consider that the number in my model (80) is actually less than the other two framework agreements. I conservatively said 80 but if you read the transcripts Liqtech said they expect 120 from these two framework agreements.

4. How likely is another capital raise?

Liqtech came out last week and said they don’t need to raise capital this week. They said they had more cash then they had at the end of the second quarter. And soon they are going to be getting a tonne of cash from orders. I agree $4 million doesn’t seem like a lot but given their comments it would definitely be a surprise to me if they raised at this point.

What I think of the IMO 2020 meetings

This wasn’t a question but I had commented last weekend about IMO 2020 here. This is obviously the big weight on the share price. I think the upside based on what can happen is a pretty clear picture. It’s what will happen that was thrown a curveball when the US threw its hat in the ring leading up to the MEPC meetings. But since that time the IMO approved the fuel carriage ban and basically told the flag states that if you want us to consider a proposal for a more gradual approach we want to see more details. So the result was constructive for Liqtech.

The risk remains, but in my opinion the risk specific to Liqtech falls as time passes. The implementation of the fuel carriage ban was the last step for enforcement and that was passed. The rebuke of the flag state proposal says to me that the IMO wants any proposal to clearly state that they are asking only for waivers when compliant fuel is not available and not looking to delay enforcement generally. While the clarification comment that the flag states made leading up to the meetings (which I mentioned in my previous comment) said as much, the actual proposal being voted on last week (which was what the flag states wrote at the end of August and had been interpreted by some as “an attempted coup”) sounded like it was more vague. I don’t think the IMO wants to implement a vague proposal that might open other doors. So they closed the door on that.

At this point the IMO meets next May. That meeting might have a clearer proposal for waivers on the table but I think it’s less likely that some sweeping change comes out of the blue and derails the whole thing. Barring an unforeseen event in the interim, shipowners are going to have to move forward with what they know. I think this means scrubber purchases move ahead.

RumbleOn

I was initially skeptical about the deal. RumbleOn’s third quarter numbers, on the surface, weren’t very good. The reulsts matched what I had suspected when I was watching inventory on a daily basis – in September the numbers flattened out/turned down. As a consequence they missed the unit number. I was surprised that ASP was down too. So when I saw the acquisition my first reaction was: hmmm, are they just trying to paper over a bad quarter and slipping growth?

But since then I’ve listened to the conference call a few times, read through all the documentation and I’m coming around to the deal. The quarter was still not very good though.

Let’s talk about the quarter first.

While the third quarter results and guide are disappointing I’m not sure that they are as bad as they appear at first glance. If you take management at their word, they changed their acceptance criteria for making cash offers, basically limiting offers to cases where they thought they could make at least $1,000/bike. Their “terminated” offers (meaning offers that they didn’t decide to make after the seller went through the trouble) went up from 2% to 15%, which is a big increase. They said this resulted in a 700 bike slip in inventory. That slowed unit sales, which is what I saw on the site myself.

Now you can believe them or not here. Maybe this is an excuse and the business just slowed. But what I have seen on the site is consistent with higher margin bikes being available. They said that their ASP has been much higher in Q4 (anecdotally I saw that too at the end of quarter – that ASP of inventory has definitely gone up).

Maybe the bigger negative about the quarter is that the SG&A as a percentage of revenue did not come down. It was up a little from the second quarter. I had been hoping it would come down soon as the company moved towards profitability. But this didn’t happen, which is a negative.

When I look at the Wholesale acquisition, I understand why the market was lukewarm to it. Wholesale gross margins are tiny, like 4.3%, so even with the volumes (they are expected to sell 2,000 cars a month next year) and even growing 15-20% that’s tough. Carvana has double the margins and the story there is margin expansion as they layer on services. But Wholesale can’t really layer on services because they are selling wholesale, not to consumers.

Therefore on the surface the acquisition kind of looks not that great. What you can say is that it wasn’t expensive (as one analyst on the call pointed out they are getting the business at 12x income and asked why the owners would sell so low).

So that was my first take. But I’m more constructive as I’ve thought about it some more. Here’s how I’m thinking about it now:

How much would it take RumbleOn to create a platform and distribution network to populate their new car and truck online portal with 2,000 vehicles available to consumers from the go, ramp their sales to dealer/auction up to 20,000 per quarter (which is the current Wholesale run rate), building out that network in the process, and build a distribution network to manage the supply chain? I don’t know that number but I think its higher than $23 million.

For $23 million they get immediate inventory that can go to the soon-to-be launched consumer facing site, they get a built and operating distribution network for deliveries and dealer network, and they get to layer on their consumer cash offer business. And yes they also get the dealer purchasing vertical that Wholesale excels at as well as a couple of retail locations.

Yes margins at Wholesale are really low, but it’s because they buy from dealers, refurbish and sell to auction/dealer. Wholesale seems to me to be essentially an arbiter. But I don’t think RumbleOn bought Wholesale because they were enamored with this dealer to dealer business.

To put it another way, Wholesale also has an existing network and inventory that can be leveraged to more quickly build the higher margin consumer purchases and higher margin consumer sales that RumbleOn has always planned. RumbleOn has the automated cash offer system to drive consumer purchases which will be better margins. They have their site/app/brand to drive consumer sales.

I think that looking at Wholesale’s business as-is or trying to think about how RumbleOn will improve Wholesale’s existing business is probably not paramount to how Chesrown and Berrard are thinking about it – yes, RumbleOn should be able to make incremental improvements on what Wholesale does through data analysis that improve decisions but that’s not the primary motive for the acqusition – the point is layering on the consumer online buy side with the cash offer model and consumer sales through the website, and leveraging Wholesale’s existing dealer network to maximize turns right from the start. Improvements to Wholesale’s existing business are peripheral to what they are really going for here in my opinion.

They said it multiple times on the call – RumbleOn is creating a supply side solution – they are demand side agnostic – consumer/dealer/auction – whatever. They need to be able to access each vertical and the more they can sell to consumer the better but unlike Carvana, Vroom, et al the focus is not sales to consumers. Its closer to the other way around – the focus is buying from consumers. They will sell whereever they can sell fastest to maximize turns. It’s the buy side that matter, procuring as much inventory from as possible from consumers while insuring it’s the right vehicle at the right price. If they get the buy side right the sell side sorts itself out. Wholesale fits nicely into this IMO.

So I like the acquisition. But I also think the logic behind it is complicated and I’m not totally sure the market will agree with me right away. I also think the quarter was not so good and you have to buy into management’s explanation to be okay with the results. So we may get more pain. Nevertheless, I did buy back a position on Friday.

A couple other things

I bought back Smith-Micro after the earnings report. I had said in my update that I was worried they would miss estimates. They did, kind of. I could have sworn the Roth estimate (the only analyst) was $6.7 million of revenue for the quarter. The company came in at $6.5 million. But when I looked after earnings it appears the estimate was actually $6.1 million. So I don’t know if I imagined that $6.7 million number or whether Roth changed it at the last minute.

For what its worth it means they beat, but the stock fell anyway. I didn’t think it was a bad quarter at all though. Safe & Found adoption at Sprint continues at a steady pace, there are overtures of a second carrier in the next 6-9 months, and it appears that the sunset of the legacy product used by Sprint customers is coming. These are all positives and really the only negative had to do with the peripheral Graphics business, which saw a steep revenue decline but is now at the point where it can’t hurt the company going forward. So I bought.

Vicor stock action remains a gong-show. I’m holding on (pretty much HODL at this point) and I did think their quarter was fine. There is weakness in the legacy business but the new products bookings were up 20% sequentially, which is a great number. Apparently there is a negative report or article on Vicor that has been out for a while that could be the basis for some short selling of the stock. John Dillon mentioned it on SeekingAlpha. If anyone has the report I’d really appreciate seeing it.

Portfolio Performance

Thoughts and Review

I haven’t written a post since my last portfolio update. Up until this last week I did not add a new stock to my portfolio. I have sold some stocks though. Quite a few stocks really.

I have been cautious all year and this has been painful to my portfolio. While the market has risen my portfolio has lagged. I have lagged even more in my actual portfolio, where I have had index shorts on to hedge my position and those have done miserably until the last couple of weeks. In fact these last couple of weeks are the first in some time where I actually did better than the market.

My concerns this year have been about two headwinds. Quantitative tightening and trade.

Maybe its being a Canadian that has made me particularly nervous about the consequences of Trump’s protectionism. With NAFTA resolved I don’t have to worry as much about the local consequences. But I still worry about how the broad protectionist agenda will evolve.

I continue to think that the trade war between the United States and China will not resolve itself without more pain. The US leadership does not strike me as one open to compromise. Consider the following observations:

Peter Navarro has written 3 books about China. One is called “Death by China”, another is called “Crouching Tiger: What China’s Militarism Means for the World” and the third is called “The Coming China Wars”.

In the Amazon description of Death by China it says: “China’s emboldened military is racing towards head-on confrontation with the U.S”. In the later book, Crouching Tiger, the description says “the book stresses the importance of maintaining US military strength and preparedness and strengthening alliances, while warning against a complacent optimism that relies on economic engagement, negotiations, and nuclear deterrence to ensure peace.”. The Coming China Wars, his earliest book (written in 2008), notes “China’s dramatic military expansion and the rising threat of a “hot war”.

Here’s another example. Mike Pence spoke about China relations last week at the Hudson Institute. Listening to the speech, it appeared to me to be much more about military advances and the military threat that China poses than about trade. The trade issues are discussed in the context of how they have led to China’s rise, with particular emphasis on their military expansion.

John Bolton’s comments on China are always among the most hawkish. Most recently he spoke about China on a radio talk show. Trade was part of what he said, but he focused as much if not more on the Chinese behavior in the South China Sea and how the time is now to stand up to them along those borders.

Honestly when I listen to the rhetoric I have to wonder: Are we sure this is actually about trade?

Is it any coincidence that what the US is asking for is somewhat vague? Reduce the trade deficit. Open up Chinese markets. Less forced technology transfer (ie. theft). Now currency devaluation is part of the discussion.

I hope that this is just a ramp up in rhetoric like what we saw with Canada and Mexico. That the US is trying to assert a negotiating position before going to the table and reaching some sort of benign arrangement. But I’m not convinced that’s all that is going on.

If this has more to do with pushing China to the brink, then that’s not going to be good for stocks.

I can’t see China backing down.

From what I’ve read China can’t possibly reduce the trade deficit by $200 billion as the US wants without creating a major disruption in their economy. Never mind the credibility they would lose in the face of their own population.

Meanwhile quantitative tightening continues, which is a whole other subject that gives me even more pause for concern, especially among the tiny little liquidity driven micro-caps that I like to invest in.

I hope this all ends well. But I just don’t like how this feels to me. I don’t want to own too many stocks right now. And I’m not just saying that because of last week. I have been positioned conservatively for months. It’s hurt my performance. But I don’t feel comfortable changing tact here.

Here’s what I sold, a few comments on what I’ve held, and a mention of the two stocks I bought.

What I sold

I don’t know if I would have sold RumbleOn if I hadn’t been so concerned about the market. I still think that in the medium term the stock does well. But it was $10+, having already shown the propensity to dip dramatically and suddenly (it had fallen from $10 to $8 in September once already), and having noted that Carvana had already rolled over in early September, I decided to bail at least for the time being. Finally there was site inventory turnover, which if you watch daily appeared to have slowed since mid-September. Add all those things up and it just didn’t feel like something I wanted to hold through earnings.

I was late selling Precision Therapeutics because I was on vacation and didn’t actually read the 10-Q until mid-September. That cost me about 20% on the stock. I wrote a little about this in the comment section but here is what has happened in my opinion. On August 14th the company filed its 10-Q. In the 10-Q on page 14 it appears to me to say that note conversion of the Helomics debt will result in 23.7 million shares of Precision stock being issued. This is pretty different than the June 28th press release, where it said that the $7.6 million in Helomics promissory notes would be exchanged with $1 shares. Coincidentally (or not) the stock began to sell off since pretty much that day.

Now I don’t know if I’m just not reading the 10-Q right. Maybe I don’t understand the language. But this spooked me. It didn’t help that I emailed both IR and Carl Schwartz directly and never heard back. So I decided that A. I don’t know what is going here, B. the terms seemed to have changed and C. it’s not for the better. So I’m out.

I decided to sell R1 RCM after digging back into the financial model. I came to the conclusion that this is just not a stock I want to hold through a market downturn. You have to remember there is a lot of convertible stock because of the deal they made with Ascension. After you account for the conversion of the convertible debt and all the warrants outstanding there are about 250 million shares outstanding. At $9.30, where I sold it, that means the EV is about $2.33 billion. When I ran the numbers on their 2020 forecast, assuming $1.25 billion of revenue, 25% gross margins, $100 million SG&A, which is all pretty optimistic, I see EBITDA of $270 million. Their own forecast was $225 – $250 million of EBITDA. That means the stock trades at about 9x EV/EBITDA. That’s not super expensive, but its also not the cheapie it was when I liked the stock at $3 or $4. I have always had some reservations about whether they can actually realize the numbers they are projecting – after all this is a business where they first have to win the business from the hospitals (which they have been very successful at over the last year or so) but then they have to actually turn around the expenses and revenue management at the hospital well enough to be able to make money on it. They weren’t completely-successful at doing that in their prior incarnation. Anyways, I didn’t like the risk, especially in this market so I sold. Note that this is an example of me forgetting to sell a stock in my online tracking portfolio so it still shows that I am holding it in the position list below. I dumped it this week (unfortunately at a lower price!).

I already talked a bit about my struggle and then sale of Aehr Test Systems in the comment section. I didn’t want to be long the stock going into the fourth quarter report. Aehr is pretty transparent. They press release all their big deals. That they hadn’t announced much from July to September and that made it reasonably likely that the quarter would be bad. It was and the stock felll. Now it’s come back. It was actually kind of tempting under $2 but buying semi-equipment in this market makes me a bit nervous so I didn’t bite. Take a look at Ichor and how awful this stock has been. Aehr is a bit different because they are new technology that really isn’t entrenched enough to be in the cycle yet. Nevertheless if they don’t see some orders its not the kind of market that will give them the benefit of the doubt.

BlueLinx. I don’t have a lot to say here. I’m not really sure what I was thinking when I bought this stock in the first place. Owning a building product distributor when it looks like the housing market is rolling over was not one of my finer moments. I sold in late August, then decided to buy it in late September for “an oversold bounce”. Famous last words and I lost a few dollars more. I’m out again, this time for good.

When I bought Overstock back in July I knew I was going to A. keep the position very small and B. have it on a very short leash. I stuck with it when it broke $30 but when it got down to $28 I wasn’t going to hang around. Look, the thing here is that who really knows? Maybe its on the verge of something great? Maybe its a big hoax? Who knows? More than anything else what I liked when I bought it was that it was on the lower end of what was being priced in and the investment from GSR showed some confidence. But with nothing really tangible since then it’s hard to argue with crappy price action in a market that I thought was going to get crappier. So I took my loss and sold.

Thus ends my long and tumultuous relationship with Radcom. I had sold some Radcom in mid-August before my last update primarily because I didn’t like that the stock could never seem to move up and also because I was worried about the second quarter comments and what would happen to the AT&T contract in 2019. I kept the rest but I wish I would have sold it all. In retrospect the stocks behavior was the biggest warning sign. The fact that it couldn’t rise while all cloud/SAAS/networking stocks were having a great time of it was the canary in the coal mine. As soon as the company announced that they were seeing order deferral I sold the rest. I was really quite lucky that for some reason the stock actually went back up above $13 after the news (having fallen some $4-$5 the day before mind you), which let me get out with a somewhat smaller loss. The lesson here is that network equipment providers to telcos are crummy stocks to own.

Finally, I sold Smith Micro. This is a second example where I actually didn’t sell this in the online portfolio until Monday because I didn’t realize I had forgotten to sell it until I put together the portfolio update. But it’s gone now. I wrote a little about this one in the comment section as well. The thing that has nagged me is that the second quarter results weren’t really driven by the Safe & Found app. It was the other products that drove things. That worries me. Again if it wasn’t such a crappy market I’d be more inclined to hold this into earnings and see what they have to say. They could blow everyone away. The stock has actually held up pretty well, which might be saying that. Anyways I’ll wait till the quarter and if it looks super rosy I’ll consider getting back in even if it is at a higher price.

What I held

So I wrote this update Monday and Vicor was supposed to report Thursday. Vicor surprised me (and the market I think) by reporting last night. I’m not going to re-write this, so consider these comments in light of the earnings release.

One stock I want to talk about here is Vicor, which I actually added to in the last few weeks. Vicor has just been terrible since late August. The stock is down 40%. I had a lot of gains wiped out. Nevertheless this is one I’m holding onto.

I listened to the second quarter conference call a couple of more times. It was really quite bullish. In this note from Stifel they mention that Intel Xeon processor shipments were up significantly in the first 4 weeks of the third quarter compared to the second quarter. They also mention automotive, AI, cloud data centers and edge computing as secular trends that are babies being thrown out with the bath. These are the areas where Vicor is growing right now (Vicor described their core areas on the last call as being: “AI applications including cloud computing, autonomous driving, 5G mobility, and robots”).

Vicor just started shipping their MCM solutions for power on package applications with high ampere GPUs in the second quarter. They had record volume for some of their 48V to point of load products that go to 48V data center build outs and a broader acceptance by data center players to embrace a 48V data center. There’s an emerging area of AC-DC conversion from an AC source to a 48V bus. John Dillon, who is a bit of a guru on Vicor, wrote a SeekingAlpha piece on them today.

I know the stock isn’t particularly cheap on backward looking measures. But its not that expensive if the recent growth can be extrapolated. I’m on the mind it can. Vicor reports on Thursday. So I’ll know soon enough.

The second stock I added to was Liqtech. I’ve done a lot of work on the IMO 2020 regulation change and I think Liqtech is extremely well positioned for it. When the company announced that they had secured a framework agreement with another large scrubber manufacturers and the stock subsequently sold off to the $1.50s, I added to my position.

I’m confident that the new agreement they signed was with Wartsila. Apart from Wartsila being the largest scrubber manufacturer, what makes this agreement particularly bullish is that Wartsila makes its own centrifuges. Centrifuges are the competition to Liqtech’s silicon carbide filter. If Wartsila is willing to hitch their wagon to Liqtech, it tells me that CEO Sune Matheson is not just tooting his horn when he says that Liqtech has the superior product. I’ve already gone through the numbers of what the potential is for Liqtech in this post. The deal with Wartsila only makes it more likely that they hit or even exceed these expectations.

Last Thought

I took tiny positions in three stocks. One is a small electric motor and compressor manufacturer called UQM Technologies. The second is a shipping company called Grindrod (there is a SeekingAlpha article on them here). The third is Advantage Oil and Gas. All of these positions are extremely small (<1%). If I decide to stick with any of them I will write more details later.

Portfolio Composition

Portfolio Performance

Thoughts and Review

My method of investing generates a lot of losers. I think it’s a pretty good bet that over 50% of the stocks I pick for my portfolio lose money.

My performance is generated primarily by a few winners that end up being big winners. When I went through a slump in late 2015 – early 2016 I pointed out how few multi-baggers I had. I was generating lots of losers of course, but I didn’t see that as a problem. The problem was that the winners weren’t winning enough. For my method to work, I need at least 2-3 stocks a year that go up 2-5 times.

The math on that works in my favor. If I have 2 stocks a year that make up 4% of my portfolio each (I usually start out at 2-3% positions but add as they go up) and they go up 3x then my portfolio gains 24% from those positions. If they double then I gain 16%. If I can manage the rest of the portfolio to limit the damage; sell the losers before they get too destructive and have a few other smaller wins to help offset the losses, then overall I’ll do okay.

Anyways, that’s my plan. Its why I invest in a lot of businesses with high upside but questionable paths to achieve that upside. I’m fine with those that don’t pan out, as long as a few of them do.

Since last summer my big(gish) winners (this is off the top of my head) were: Combimatrix, R1 RCM, Gran Colombia, Aveda Transportation, Vicor, Helios and Matheson and Overstock.

Combimatrix was taken over and ended up being between a 2-3 bagger. R1 RCM was a triple. Gran Colombia is almost a double so far from my original purchase at $1.40. Aveda Transportation got taken over a couple weeks ago and was nearly a double. Helios and Matheson was a little less than a triple (I sold out well before the top, in the $9-$10 range) and Overstock was about a 70% gain.

Both Helios and Matheson and Overstock turned out to be flops in the end, but that’s okay too. A big part of my strategy is to know what I’m getting into, and not fall in love with it because there is a good chance it ends up going south. In both those cases I was pretty cognizant of the company’s faults, and I freely admitted there was a lot of uncertainty with both. As the faults materialized, or as too much optimism was priced in, I reduced my position in each and eventually sold out.

Vicor Results

I had been going through a drought in the new year before I finally got the move I had been waiting years (literally years!) for with Vicor. Finally the rest of the tech-world is catching up with Vicor’s 48V converter technology. Applications are popping up all over. There are the 48V servers, which were the original reason I got into the stock, but also low voltage GPUs (from Nvidia and AMD) requiring power on package, new areas like electric vehicles and AI, and most recently the evolution of a reverse 12V to 48V datacenter application. All these customers seem willing to pay for Vicor’s superior and patented technology.

I looked at Vicor way back in March of last year and worked out the numbers on an optimistic trajectory for the company. At the time I pointed out that while the stock didn’t appear cheap on most metrics (it had no earnings and was at a fairly high P/S ratio given the lack of growth), if they could follow through on their growth plan, the earnings they could generate were pretty impressive.

I updated that model recently based on new projections and the fact that after the first $100 million of earnings Vicor is going to have to start paying taxes (they have about $34 million of valuation allowances right now).

It looks to me like a $450 million of revenue run rate gives Vicor about $2.10 EPS when fully taxed.

After the first quarter numbers its looking more like that first $450 million of revenue could happen sooner than you think. $450 million is roughly what Vicor can do in their current facility.

Vicor is expecting to double capacity with a second facility later this year. If you assume that Patrizio (Vicor’s CEO) hasn’t gone off the deep end and that they can fill that second facility, the earnings numbers get much higher. Given that right now they are growing at 10% sequentially and that is before the larger orders that are expected in the third quarter start hitting.

I am inclined to hold the stock with the view that we are just getting started.

What I did in the Last 5 weeks

As I said I will always have a lot of losers. An important part of the strategy is to sell that which I perceive as not working out.

In the last month I did more selling than buying. This is partly due to broken theses but also because I remain cautious about the market. But to be honest, this caution has hurt me more than it’s helped.

Much of my selling has been poorly timed. For example, I sold Largo Resources at 1.30, only a couple of days before the stock made a run up to $1.90. I’ve written about the Largo story before: Largo is a great theme play on vanadium but it has always been hard to make the stock look cheap by the numbers. That has nagged at me and it finally won out. I took a nice gain on Largo, having bought it at 80-90c, but it still hurt to watch the stock subsequently take off.

I also sold Aehr Test Systems shortly before it ran from $2.20 to $2.60. With Aehr I took a loss. I’m still not sure whether I did the right thing selling it. On the one hand it feels late in a semi-equipment cycle, and the company has had very few announcements of new contracts lately. On the other hand it appears their relationships with Intel and Apple are intact and so the next big deal could happen at any time. It’s a tough stock to judge.

I also had poor timing with Essential Energy, which I sold at 55c range after listening to their fourth quarter conference call. The call painted a depressing picture of drilling in Western Canada. I didn’t get the sense they had any pricing power and the year over year utilization rate appeared to be flat. Now maybe that has changed as oil has risen another $10 since I sold. As well, the lawsuit with Packers Plus is in appeal (so its still not settled), which means a takeover is unlikely. I decided to focus instead on US leaning servicing companies like Aveda Transportation (which subsequently got taken over for a double, though it was a modest position for me) and Cathedral Energy Services, which I continue to hold.

I had somewhat better timing with my exit of Sherritt International, as the stock sank after I sold. But even the jury is still out as the share price has come back with nickel skyrocketing.

I likewise sold my position in both Orocobre and Albemarle. This fits into the “loser thesis” even though I made small profit on Orocobre. My thesis was that the consensus for lithium had under-estimated demand and over-estimated supply. However, the more I’ve learned about the supply/demand dynamic the less sure I am. It’s not so much that I’m a believer in the coming lithium supply tsunami. It’s just that I’m unsure enough to not want to make the bet either way. I’ll revisit these names again, especially Orocobre, but I need to study lithium some more and make sure I’m not wrong about it.

I also exited my position in Foresight Autonomous. I mentioned the stock last month and its just not working. They are going to need capital at some point and the recent death that was at the hands of an autonomous car isn’t helping. But probably my biggest reason for the turnaround is that this just doesn’t seem like a good market to be holding many nano-caps in.

Finally I reduced my DropCar position (which is heavily in the red) by about 20%. I probably should have reduced this stock earlier, but it was a tiny position to begin with (~1%) and so I’ve been more willing than maybe I should have been to give it some leeway. I still think they could pull off some big growth but the revisions of their option strikes, the share offerings and the lack of news has worn me down. Being down 40% on the position means at this point it so small that its a bit of a lottery ticket. Which is really what it always was.

Gold and Oil

What’s been working for me are my gold and energy stocks. Those that follow the blog know that I’ve been holding a number of gold and energy stocks for months now and that number has been increasing. Up until recently they have done nothing.

I wrote up my reasons for owning Golden Star Resources a few weeks ago.

I also continue to hold Gran Colombia Gold. I admit that I am a little nervous about selling pressure in the near term. I don’t totally understand what the short term outcome of the 2018 debenture conversions will be and whether sellers of those debentures will pressure the stock over the next while. Nevertheless, I think the company is on track for a re-rating at some point and I’m happy to wait out the weakness.

I also have positions in Jaguar Mining, RoxGold and Wesdome.

The idea with these stocks isn’t really about gold prices. I don’t feel like I am making a bet on whether gold will imminently go through the roof. I feel like I’m just buying stocks that are really cheap.

All the miners I mentioned above have EV/EBITDA ratio of between 2x and 5x. Those multiples are trailing ratios that are based on lower gold prices then what we have now. Each of the miners has good growth prospects and an exploration upside if drilling comes up positive. Apart from Gran Colombia, they are all well off their 52 weeks highs.

I also recently took a small position in Asanko Gold. The stock has been written up a number of times on the IKN blog. Gold Fields recently did a deal with Asanko, taking 50% of their property in return for enough cash to pay out their debt. Otto Rock, who writes on IKN, thinks Asanko should trade back to at least 1x book value now that Gold Fields is available to provide their expertise and hopefully right the ship at the Asanko Gold mine.

So if the gold price breaks out, that’s an added bonus. But these stocks are more of a play on sentiment. I think all I really need on the commodity side is for gold not to crash.

I don’t really have a crystal ball with what gold will do. I will note that the chorus of the gold bears on twitter seems very loud right now. “It didn’t go up with North Korea”, “It can’t break $1,360”, “It’s setting up a technically bearish formation (a compound fulcrum top?)”, “The Australian dollar, the Canadian dollar are canaries in the coal mine that the rally isn’t real”, and so on.

Who knows? Maybe they will be right this time.

I have been reading about the 70s, and in particular what Nixon did that led up to the Smithsonian agreement. The circumstances today are different of course, but not so different, and I was surprised how much of what Nixon did rang true to what Trump is doing now.

Nevertheless, I own tiny companies that are not in the GDX or GDXJ, typically don’t follow gold prices all that closely (Golden Star went down nearly 40% during the last gold rally!), and have unique attributes that I believe will lead to price appreciation. Gran Colombia, which is up 90% since I bought it last summer, is the poster child for this.

On the oil side I have all my old names: Gear Energy, Spartan Oil and Gas (which got taken over so now I effectively hold Vermillion shares), Zargon Oil and Gas, and InPlay Oil and Gas. I also bought WhiteCap as another way to play the run.

On the US side I continue to hold SilverBow and Blue Ridge Mountain. I also added Extraction Oil and Gas, which looks to be generating a lot of free cash in the coming years at these prices. I’ll write something up on them shortly.

The summary of what I have read on oil is that things are potentially tighter than we realize, that they are getting tighter, and that relying on a small patch of west Texas to supply the world’s growth is likely not the best strategy.

I’ve been surprised by the strength in the oil stocks. They seem to go up every day, and a lot of days they start down big and recover throughout the day. It’s hard to see that as bearish. I’ve read about the big net long positions, and I suppose that means we get a correction here at some point soon. But I’ve held these stocks for this long, I might as well see it through.

New Purchase: Ideal Power

The one stock I bought that I will mention in some detail is Ideal Power. This is the perfect example of a high risk, tiny little micro-cap that has a chance (maybe not a big chance but a chance) of being a 5-10 bagger.

Ideal Power sells inverters into the solar industry. One of their inverter products, called the Sundial, has been built into a Flex solar plus storage offering called NX Flow. NX Flow, interestingly enough, uses a vanadium battery.

Flex initially had huge expectations for NX Flow. Leading up to the product launch in December, Flex was saying they could sell 15MW per week of their product.

Now if you do the math on 15 MW per week, considering that Ideal Power sells their Sundial for about $10,000 per unit, that there is one Sundial per 30 KW capacity, you get a very, very big revenue number.

The reason the stock is at a buck and change is that those sales forecasts haven’t materialized. Maybe they never will. Flex is trying to “educate” their customers on the vanadium battery. The real benefit of a vanadium battery compared to its lithium-ion competitor is that the vanadium battery doesn’t degrade over time. The life span can be significantly longer and performance doesn’t suffer. The problem is that customers are used to buying a battery strictly on a per MW basis. On that metric alone the vanadium alternative appears more expensive.

Nevertheless Flex is a big company and I don’t believe they just pulled these numbers out of their ass. I feel like it’s worth a bet that the NX Flow begins to get some traction.

The stock has one other lottery ticket in its back pocket. Ideal Power has developed an alternative switch for converting between DC and AC power called a B-Tran device. Pretty much every inverter out there has some combination of IGBTs, MOSFETs and diodes that let you switch power back and forth from AC to DC and vice versa. The B-Tran can do this too, and it can do it while reducing losses to 1/10th of what an existing IGBT solution will have. The double-sided nature of the device means that you can replace two IGBT’s or MOSFETs, and two diodes with a single B-Tran. So there is a cost savings.

The company just finished prototyping the device using their anticipated manufacturing process and it appears to work as advertised. The power semi-conductor market is $10 billion and the company has said that if all goes well B-Tran could address 50% of that.

Look I have no idea if this concept flies. It seems to have some merit based on what I’ve read from various electrical sites and papers but its very technical, there is incumbency at play, lots of factors will determine the success. My main point is if you are going to throw a hail Mary you might as well go for the end zone and that is exactly what this is.

The stock has a $20 million market cap and $12 million of cash, which they are burning as we speak. I could easily see myself selling this stock at 80c in 6 months time. In fact, that’s probably the base case. But the bull case is so big that I believe its worth the risk.

Portfolio Composition

The long wait for Vicor to post a step change in results is over. With the release of the fourth quarter there was an end to the delays and they put out some solid concrete numbers. To be sure, the fourth quarter itself was not very good (this was expected), but guidance and color around what to expect next quarter and beyond was very positive.

Here’s a summary

Backlog at the end of the fourth quarter sat at $73 million compared to $60 million at the end of the third quarter

Bookings grew 11% sequentially to $71 million

Bookings thus far in the first quarter were $55 million (through 8 weeks of a 13 week quarter)

They expect sequential bookings improvement throughout the year

As is typically the case, Vicor gave hard data on the next quarter but you had to piece together the long-term picture from circumstantial evidence and color. This quarter we got to extrapolate from their comments on facility expansion.

Vicor has a 240,000 sq. ft. facility in Andover, MA. They said on past calls that they can produce $400-$600 million of revenue from Andover. In the fourth quarter updated/reiterated that this number at $500 million.

In the past Vicor has talked about adding capacity by purchasing or leasing additional space nearby. From the second quarter call:

…we’re also actively looking for incremental space nearby, not far away from the Andover facility, to further expand capacity in about 1-year time frame

On the third quarter call they hinted that this plan might be evolving as they were leaning towards building their own facility. Last week they confirmed this was the case, and in the process gave us a hint about where revenue might eventually go:

…we’ve had a change of plans regarding that. What we concluded after investigating certain options in the neighborhood of our existing Federal Street facility is that a building of the order of 80,000 to 100,000 square feet would not serve our long-term needs. So we were able to secure a deal with a partner to help our short-term capacity requirements to give us some breathing room for breaking ground on larger lot with considerably more room for expansion. So we’re looking at options for as much as 250,000 square feet, which would be equivalent in terms of capacity to our Federal Street building.

So the circumstantial evidence that we got is that while they have a $500-$600 million revenue facility, they have decided to forego a 100,000 square foot addition via an existing nearby building in favor of building another $500-$600 million facility. They are taking this course of action because they think they would outgrow the smaller facility.

Conclusion

The reason I have been in Vicor is because of the potential for big revenues as they ramp product for 48V servers, for automotive, and for high-end FPGA’s that utilize power on package technology. They have always been vague about how big these opportunities might be. With the fourth quarter results we started to get some sense of that size.

To be honest, the opportunity needs to be big, because the stock isn’t particularly cheap. At a $27 share price the enterprise value is about $1 billion. Trailing twelve month revenue is $227 million and EBITDA is non-existent.

Looking forward, if we get 50% growth in 2018 and if gross margins improve to 50%, I estimate that EBITDA should be around $70 million if most of the gross margin falls to the bottom line. That gives Vicor a 13.5x EBITDA multiple.

Vicor starts to look cheap if you think they can get to $500 million plus of revenue. Again, assuming a modest increase to operating expenses (I’m guessing $140 million annualized), and an uptick in gross margins to 52%, I come up with $135 million of EBITDA, which would give Vicor a forward multiple of 7.5x.

Of course if you start factoring in the second facility, you are looking at $1 billion plus revenue and then the stock clearly has further to run.

So that’s the potential trajectory. It’s actually always been the big picture that I have hoped would play out. With the fourth quarter numbers and first quarter guidance, that picture is a little less presumed and a little more expected. Its still a long way from being a sure thing, but its moving in the right direction. And that’s why you have gotten the move in the stock that you have.

I’ve owned Vicor for over a year. During that time I’ve been twiddling my thumbs waiting for the promised revenue ramp. It looks like it’s almost upon us.

The company had a bad fourth quarter: revenues down sequentially from $53 million to $48 million, gross margins down sequentially 17%, negative EBITDA. But as the stock price attests, none of this matters because guidance and color around the VR13 ramp was excellent.

The story going forward is simple. The company says that with recent design wins and product launches, in particular wins for new data centers that will utilize the VR13 standard (more on that in a second), as well as high performance computing, automotive and defense, they can grow revenue 3-5x in the next couple of years.

Here’s what’s happened between now and then:

3 quarters of delays in the Skylake Intel chip necessary for the VR13 standard to take off and with that for Vicor to capitalize on its design wins (I’d recommend going back to read my previous post to get the details on the VR13 chip and Vicor’s integration with it), and

the Skylake chip is finally available (at least in pre-production) and fourth quarter suggests a turn is upon us as Vicor has started to ship power converters for VR13 design wins.

The company said on the fourth quarter call that they had “began to ship the VR13 version of [their] 48V point-of-load solution” and that shipments of the VR13 solutions would “ramp more steeply” in the second quarter. Shipments for the 48V point of load solution increased 15% sequentially in the fourth quarter and the 1 year backlog would had risen 14.8% sequentially. They expected at least 10% sequential revenue improvement in the first quarter.

With the story on the verge of happening, the questions become A. what’s the end game and B. is there enough upside in the stock left. Keep in mind that even though we are only starting to see the story blossom, the stock is 50+% higher than when I first bought it.

I’m not much into detailed modelling. I do some models, but they are pretty half-ass compared to what you will see from professional research. I don’t have a lot of time, and I find that I am better hedging my uncertainty with position sizes and stops then pretending that I can put together an accurate model that I can rely on.

I make a model to get one or two basic answers. At what growth rate does this company get profitable or at what growth rate does the current stock price start to look cheap?

It was the second question that I needed to answer with Vicor.

I would call Vicor a modeling play. It seems reasonably clear that revenue is going to ramp. Its just a question of how quickly and by how much. The end game is that they reach their objective of 3x revenue in the next 3 years.

Here’s the model. It’s the same model I put out a year ago, tweaked for current run rate expenses and guidance. I’m not trying to model 2017. I’m looking ahead at what the company is saying they can do with revenues as the VR13 data center opportunity ramps to its full capacity.

I’m accepting management’s comments that operating expenses are dominated by headcount, that they don’t expect this to scale with the top line increases, and that most of top line growth will drop to the bottom line. I’m also assuming that management’s assertion that gross margins can transition to the low 50%’s by the end of 2017 is correct. And my long-term target is a little over 2x revenue, not 3x revenue.

The stock price doesn’t look too bad after considering that there is this kind of upside. I almost never buy options, but I decided to buy a few October calls on Vicor. It seems like a reasonable situation for it. The ramp is going to happen in the next 6 months. The potential numbers that are materializing should be pretty clear by the fall. If this is going to play out like Vicor says it will, its going to be clear shortly. I hope they’re right.

I had such a great response from my single story formatted post on Radisys that I decided to change things up a bit for the blog. Rather than posting monthly consolidated letters where I sum up all my thoughts, I am going to try to deliver updates in a more traditional blog format, writing as things come up.

Vicor

Its interesting to contrast Vicor with Radisys. Both companies are in a similar place; they have a large opportunity ahead of them, that opportunity is beginning to realize itself with new orders, the order build should really hit its stride in the second half of 2017, and the next couple of quarters will be relatively weak as we wait for the order book to build up.

The difference between the two companies is the way the market has interpreted the results. Vicor was up nicely on the day after their earnings release and has held up relatively well as the small cap market has suffered. Radisys was down and has continued to be down since their release.

Vicor reported a good quarter. VI Chip bookings were up 54%. Picor bookings were up 122%. Only legacy BBU bookings were down at 14%.

More importantly, on the call the company announced the first of its VR13 orders, “some major million dollar type orders that obviously are well beyond the prototype level”.

For those not following the story, VR13 refers to an Intel Skylake chip based server specification whose ramp has been delayed by continual delays in the Skylake chipset. Intel announced in their quarterly call that they were now shipping Skylake chips for sampling. Vicor’s announcement provides follow through to that data point.

Vicor also announced some other interesting development news. In last 3-4 months, they have been doing work on power on package technology, putting point of load power multiplier on the ASIC to provide 100’s of Amps in 6V to 1V range. Within several weeks they expect to see the first production of once such solution.

I added a little to my position in Vicor. I think that the VR13 ramp is upon us and results are more likely to surprise positively than negatively going forward.

Radcom

There was something a little bit off about the Radcom call. Maybe it was my expectation, or at least hope, that there would be some new announcements. There wasn’t.

It didn’t help that a replay of the call wasn’t posted until this morning. I wonder whether the delayed move in the stock is because of folks that couldn’t listen to the call and didnt’ get their first impression until this morning.

There were some positives. There was the extension of deals with two CSPs. There was the use of the word “accelerating” for several of the CSPs that they are engaged with. And there was color that 2017 has some upside on smaller non-NFV deals with emerging market CSPs.

But there were also a number of things I didn’t like to hear. I didn’t like the language around the relationship with AT&T being “ok”, which is the term they used a few times. And I didn’t like that they continued to be vague about the new product that they won’t talk about and haven’t released to the wider market.

Referring back to my post last month on Radcom, I had been hoping that there might be an announcement piggybacking the announcement by Gigamon and their involvement with AWS and AT&T. The question was actually asked on the call, and while the answer was cryptic enough to leave the question open ended, its hard to verify that a GIMO/AT&T/AWS connection is there.

Also, if I understand the wording around the estimate that Radcom’s service assurance total addressable market (TAM) is $100 million between now and 2020, maybe 2018 given acceleration, it’s not really that big, and it shows they really do need to expand to new products to grow into valuation.

Finally the guidance that “the models” are saying no deals until the second half 2017 is sobering. They had originally anticipated deals towards the end of this year, beginning of next year. This isn’t surprising to me, I mean everything that I have read about service providers is that they move at a glacial pace, but its still a slip from the original color.

So I reduced. I resized Radcom so it is now closer to a regular sized position for me. No need to try to be a hero. I wouldn’t sell any more at these levels. It was a big move down this morning. And the upside is still significant, so its a stock I want to own. But I don’t want to have my portfolio heavily dependent on the story if it won’t play out until the second half of 2017. I have enough “2017 stories” already. I’ll keep my reduced stake and wait until we get closer and see where the price shakes out.

Portfolio Performance

Top 10 Holdings

See the end of the post for my full portfolio breakdown and the last four weeks of trades

Thoughts and Review

Its been a good market for my approach to investing. Volatility is low and the market isn’t really making any big moves. Individual companies are being judged on the merits of their business and the macro picture is taking a back seat.

I believe I have also benefited from being more selective. As I have written previously, I’m taking fewer flyers, being more suspicious of value, staying away from dividend payers and focusing on growing businesses and emerging trends.

As a result these have been the best couple months that I have had in a while.

I made a number of changes around the edges of my portfolio, adding starter positions in a number of names, reducing position size in others, but I remained relatively constant in spirit: I have two large positions: Radcom and Radisys, and a number of small 2-4% positions where I am waiting for a reason to make them bigger.

With respect to my two biggest positions, nothing was said or reported over the last month, including their second quarter results, that deters me in my allocation. I will give a quick synopsis of Radcom’s quarter below. With Radisys I spent a lot of time on them a couple of months ago so I will wait until the next update to say more. In short though, the results were fine, they are engaged with a lot of carriers, they seem extremely confident that those engagements will lead to more deals and we will wait and see what new business the second half brings.

I did add five new positions to my portfolio in the last month. I’m not sure what it was about this month that made it such a boon for ideas. It wasn’t because I worked unusually hard to find them. I just went about my usual process and for some reason kept coming up with interesting stocks.

I’ll talk about 3 of those positions (Bovie Medical, Hudson Technologies and Sientra) in this post. In the interest of space I will leave the other two, Mattersight and CUI Global, for next month. This being an August update I have a lot of earnings news I want to talk about and I don’t want things to go overly long (though I suppose it always goes overly long, so relatively anyways).

With that I will cut-off my general comments and get straight to it, starting with some company updates followed by my new positions.

The press release from AT&T validates the work that Radcom has done, and should make the company the go-to player for other service providers following in AT&T footsteps with ECOMP. I have always felt the big risk with Radcom was the execution of such their large and cutting-edge deployment with AT&T and that something went off the rails. That seems off the table now.

As an aside, I found this webinar, which includes a description by AT&T of what they are trying to accomplish with ECOMP, to be quite useful in trying to understand the platform.

While the second quarter results were inline, on the conference call Radcom’s CEO Yaron Ravkaie made a number of bullish comments. He said that Radcom was now in discussions with 9 carriers, up from 5 in the first quarter, and that the earlier discussions had progressed positively, with feedback coming back from carriers that “this is exactly what we need and we want to progress with it”.

Interesting new opportunities are also opening up. Radcom has soft launched a new adjacent product to MaveriQ that Ravkaie called a “very important component of NFV implementation”. I am assuming this was a joint effort with AT&T to some degree since the product is already being used by AT&T even though they have only started marketing it to other carriers.

A final interesting comment was made at the end of the call when Ravkaie referred to a Tier 1 carrier that was recently in their office in Tel Aviv, their “head of their NFV program spend hours with them”, he went “deep into their NFV strategy” and was interested in “partnering” and “co-creation of cutting edge stuff”.

The negative with the story is timing; we don’t know when the next deal signs and telecom providers are notoriously slow footed. I felt like Ravkaie was cautious about timing, making the following comment on the second quarter call:

the next coming quarters is going to change some of these into deals, and again I can’t really comment on when it’s going to happen, and on exactly when is the next order is going to come in, because everything is so new, so it’s hard to predict. And because as of the end of the day, big solutions in the telecom’s environment, so it does take time

Nevertheless it remains a great story. The stock has moved up strongly since earnings. I’m not sure where it goes in the short run, it all depends on the “when” with the next deal, but I see no reason to believe they won’t get that next deal done at some point.

Willdan looks good

The single sentence story on Willdan is that the company had very strong second quarter results, beat estimates significantly, guided higher for the year, said on the conference call that they have signed contracts that will be deployed in 2017 that they just can’t announce yet, said that revenue in 2017 will show further sequential growth, and said that their micro-grid strategy is taking hold with “increasing evidence to suggest that overall spending on microgrids will increase significantly in the coming years and we are well positioned to capitalize on this emerging market opportunity.”

Willdan reminds me of Argan, which was a little engineering, procurement and construction company that I found on the Greenblatt Magic Formula list back in 2011 (I just checked and its still there!) when the stock was $8. I bought the stock but sold it a few months later at $14. Argan continued to run from single digits to almost $50 now on the back of successful growth of their engineering services.

Argan demonstrates how engineering services can be very profitable if you have a team of the right professionals and you are delivering a service along the right trend. I have said before that I think that we are on the cusp of changes to the power grid that will mirror what we saw first in computing and storage (ala the advent of the datacenter) and currently in telecom service providers (which is why Radcom and Radisys are my biggest positions). If I am right about that Willdan is positioning itself to be in the middle of the build-out.

Oclaro was fine but Infinera made it a bit of a debacle

Oclaro had an excellent quarter, beating estimates and putting out strong growth guidance which was good news. Unfortunately I only held about half the position that I had only a few days before.

I got turned around by a report out of Needham entitled “Optical Super Cycle”. I don’t get Needham research, but I caught wind of a report they had in mid-July that described an optical upgrade super-cycle and managed to get my hands on it. Its compelling; the explosion of data is causing metro, long-haul and data-center interconnect to require upgrades simultaneously.

Its exactly the reason I am in Oclaro. But after being convinced by Needham, I felt like I needed more. So I went with one of their recommendations, a company called Infinera that seemed to be well positioned in long-haul, had the ability to take market share in metro, and wasn’t expensive compared to its peers. No problem right?

Well Infinera announced results three days later and gave probably the worst guidance I have EVER seen. Ever. The company guided third quarter revenues of $180-$190 million versus Capital IQ consensus of $271 million.

This caused a couple of things to happen. First I lost a large chunk of my investment in Infinera. Second, it really shook my confidence in Oclaro, which is a much larger investment for me. After some back and forth I decided to cut the position in Oclaro in half.

My reasoning hear was admittedly a bit suspect. Infinera didn’t appear to be a big Oclaro customer. Oclaro has significant business in China, a market where I don’t think Infinera plays at all. The evidence from the call was that much of Infinera’s problems were internal, in particular that they weren’t gaining share in the metro market like they had anticipated and that a recent acquisition wasn’t bearing expected fruits. Nevertheless what Infinera’s disaster highlighted to me is something that I have always worried about with Oclaro; that I will be the last to know when the optical cycle turns, and that these cycles turn quickly.

Well Oclaro announced their results and they were stellar. Both their results and those of some others suggest that the cycle hasn’t turned yet. Oclaro said they expect at least 30% growth in 2017. Gross margins are expected to expand into the mid-30s from the high 20’s they were only a quarter ago. Their 100G transceiver business has doubled in the last year. The company is well positioned with the two vendors in China (Huawei and ZTE) where their growth depends. The stock has continued to go up since, nearly hitting $7 on Friday.

But I can’t add. I’ll stick with my half position but that’s it. The cyclicality scares me, in particular the fact that they don’t really get to pass through price increases even when the cycle is in their favor, so the benefit is all volume and when the cycle ends or when inventory builds they will be smacked. Needham could very well be right and maybe that doesn’t happen for 3+ years. But I haven’t been able to put together enough knowledge to feel really confident about that. So I think I’ll just leave that one as is.

What is going on with BSquare and DataV is interesting

Here is why I added to BSquare. They had a crappy quarter. The stock tanked. The company has a market capitalization of $54 million but subtracting cash the enterprise value is only $27 million. The market has left them for dead but I’m seeing data pointing to how their new DataV product might on the cusp of taking-off.

Right now DataV has one announced customer, a $4.3 million 3 year contract with an industrial company. Because this company is so small, and because DataV has 70% margins, it won’t take many contracts to be meaningful.

In my last blog post I highlighted a career opportunity I read about on the BSquare site. In particular I noted the following language in one of the sales job postings:

Bsquare is investing significantly in marketing demand generation tied to its industry leading DataV IoT platform. Market response has overwhelmed our current sales capacity, and we are looking for proven inside sales dynamos to join our team

I thought that was pretty positive. Last week I went and looked at the job postings again. There were a bunch of new one’s for android developers but also I found they updated the posting I referenced before, (its here) with the following additional language about responsibilities:

Responsible for making 30-70+ outbound calls (including follow up) per day to inbound leads

I don’t know if this is saying what it reads, but an inbound lead should be a company that has first contacted BSquare, so 30-70+ calls to those leads is an awful lot. Are they exaggerating? Or is there that much interest in the product?

They also quietly published this interview on their website, describing the integration of DataV with a heavy-duty truck environment. Whats confusing about this is that there was a question on the first quarter call that suggested to me that the one DataV customer they had was VF Corp, which is not a trucking or industrial company.

The company has like zero following. There were no questions at all on the last conference call. The only intelligent questions I’ve heard in the last few calls is some private investor named Chris Cox who I am presently trying to hunt down (feel free to drop me a line if you read this Chris!). I don’t think anyone cares about this name. Maybe there is good reason for that. But maybe not.

RMG Networks – will have to wait another quarter for the inflection

RMGN results were somewhat lackluster, the CEO had said that they would be growing revenues sequentially from here on out on the first quarter call and that didn’t happen. Revenues were flat, the issue was that the international business lagged and some timing of sales issues. In particular it sounded like the Middle East was down a lot sequentially.

So it wasn’t a great press release but the color on the call was very positive. In a separate news release they said they had a sales agreement with Manhattan Associates and gave further color on that relationship on the call. RMG Networks had previously been something called a bronze partner with Manhattan which meant they would be recommended by sales if it came up but there was no compensation to the sales staff for any sales they created. The new agreement integrates them into the selling package, most importantly now is that sales gets commission on the RMG products that they sell. Because the products are complimentary this is expected to drive sales. Manhattan Associates is a supply chain solution company so the partnership is right in line with what RMGN is trying to expand into and is also a $4B company so much bigger than RMGN.

They also said they have similar relationships that have been agreed to in principle but are not press releaseable quite yet with two other partners.

The second positive is that the 3 supply chain trials that they have referred to in the previous quarter has progressed into the purchase phase. We should start to see revenues from those in the coming quarters. The CEO gave a lot more color around the sales pipeline and how many leads they are generating and also with respect to the team that they have put together. He really tells a good story, though that can be taken both ways I guess. He is bringing people aboard that the market likes, signing agreements and getting their foot in the door where needed so I am inclined to believe this is just a waiting game to see how it translates into revenues in coming quarters.

Medicure has lots of catalysts, have to wait for them to materialize

As for Medicure, results again were probably a bit weak, I would have liked to see revenue at $8 million but $7.7 million is still pretty strong. The bottom line was hurt by a large stock option expense, and they price their options as awarded so it all hits in a single quarter, you don’t get the spreading out of the option effect that most companies see.

Overall the idea is still there, they are continuing to gain market share with Aggrastat, hospital bags purchased increased 16% sequentially, the company said that June was their highest sales quarter since December and in a response to one of the questions on the Q&A they implied that the disconnect between sales and scripts should resolve itself into high sales, likely in the third quarter.

They are on-track to hear back from the FDA with respect to the bolus vial in the second half of the year, and the Complete Response they got from the FDA back in June for the STEMI indication sounds rectifiable. They said there were 7 concerns that FDA had identified, 6 have been addressed and agreed to by the FDA and the seventh they have sent in their modification and are awaiting the response.

They also provided some color on Apicore. It sounds like they expect to plan to purchase the other 95% of the company, said that Apicore continues to grow over and above the $25 million of revenue they generated last year, and they have a new cardiovascular generic that they are developing along with Apicore that they expect to submit. They were asked again about the price for their purchase option on Apicore and they again said they wouldn’t disclose, which is unfortunate. They commented that they have built out their sales and administrative staff in response to the higher Aggrastat demand and it now has the ability to support multiple products. In particular they can add this new generic with no additional staff increase. They are also on the hunt for acquisitions of other drugs that are complimentary and low risk.

Vicor was Disappointing

I was disappointed in the second quarter results from Vicor given the expectation they had set the last quarter. Much of Vicor’s backlog depends on a server standard called VR13. The new server standard is in turn dependent on a new Skylake chipset being delivered by Intel and the chipset has been delayed (again), this time until the second half of 2017.

The consequence is that rather than orders beginning to ramp beginning in the second half, they likely won’t start receiving order for another 6 months.

I reduced my position on the news. The company still is a technology leader and they still have the best power conversion solution for the next generation of datacenters, but six months is a long time and I’m betting I can build back the position at lower prices.

As I do continue to hold Vicor, I’ll be sure to follow Intel more closely to see where they are at with the chipset. In the mean time the best Vicor can hope for is to tread water.

New Position: Bovie Medical

I came across Bovie Medical doing a scan of 52-week highs on barchart.com. This is a scan I like to do as much as possible during earnings season; you can catch stocks that are starting their next leg up because of recently released results.

Unfortunately I was on vacation at the time and so I caught Bovie a little later than I might have otherwise. I bought the stock at $2.60, which was a couple of days after they had announced earnings. That was up from $2.05, which is what it had opened at the day of their earnings announcement.

Bovie Medical operates in 3 segments:

The “core business” is made up of electrosurgical medical devices (desiccators, generators, electrodes, electrosurgical pencils and lights) and cauteries. This segment makes up largest percentage of revenues and has flat to low single digit growth historically. Bovie has said they want to grow the business at mid-single digits which they were able to accomplish in the first half of this year.

The OEM business segment manufactures electro-surgical generators for other medical device companies. It generated $1.6 million of revenue in the second quarter, up from $941,00 in Q1 and $648,000 in Q2 2015.

The growth from the OEM segment this year was somewhat unexpected. It was partially due to contract restructuring that staggered contracts – they said that contracts are typically front-end development, back end production so they staggered the contracts to even out the revenue. The company did say after the second quarter that the expected the growth rate to slow in the second half of the year but still show growth. From the Q2 conference call comments:

…second quarter performance benefited from purchase orders signed last year and several new contracts were signed in the second quarter that should contribute to revenue growth over the next several quarters.

So the OEM business is posting some interesting numbers but the real reason I bought the stock is a new product called J-Plasma that Bovie recently developed. J-Plasma is a tool that improves the outcomes of surgeries through an ionized helium stream of plasma. The result is better precision and coagulation without significant heating of the tissue.

The J-Plasma system consists of a helium plasma generator and tool disposable. Here’s a screen cap of the disposable tool just to get an idea of what it looks like.

The generator (called the ICON GS plasma system) ionizes helium and produces a thin beam of the ionized gas. You use the beam for cutting, coagulating or ablating the soft tissue. The disposable is the hand piece for delivering the ionized gas stream. It sounds like you replace the disposable with nearly every surgery. There are different disposable hand pieces offered depending on the surgery being performed. The procedure can be used on delicate tissues like fallopian tubes, ureters, the esophagus, ovaries, bowels and lymph nodes.

The initial generator purchase is in the $20,000 range, and the hand tools average $375. Bovie said on its second quarter call that they are shifting to a pay per use option with a leasing program to bypass the upfront capital expense of the generator.

The success of J-Plasma didn’t happen immediately. The company has had the product on the market since January 2015. For the first year growth was in fits and starts. In particular, the capital required from the up-front generator was a stumbling block. The company said the following about the slow progress as recently as the fourth quarter conference call:

The operating metrics and leading indicators for J-Plasma product adoption were strong in the fourth quarter, but sales were below our expectations. We continue to face an exceedingly slow pace of J-Plasma generator sales. While we know that the long sales cycle for capital equipment is an industry wide issue, we also know that our VAC approval track record has been outstanding at over 92%, which makes this situation even more frustrating.

The company is targeting two verticals. They are currently selling J-Plasma into gynecology (estimated total addressable market, or TAM, of $2 billion) and are moving into the plastic surgery business (estimated TAM of $440 million).

There are a number of other markets they can expand into including cardiology, urology, oncology and ENT.

There is also the opportunity for the J-Plasma system to be used in robotic surgeries. Bovie has an expert in robotic surgeries on their medical advisory board that has begun to use J-Plasma in trials. Results are expected in the first half of next year, Bovie is also developing an extension to the product, due to be out in 2017, that will integrate into existing robotic surgical systems. They said on the second quarter call that they are exploring relationships with “existing and emerging surgical robotic systems”.

Sales of J-Plasma increased substantially in the second quarter. J-Plasma sales were $766,000. This was up from sales of J-Plasma of $356,000 in the first quarter, which was up from $284,000 in the first quarter of 2015.

The company made a couple of moves in the second quarter that should increase exposure of the product further. On the second quarter call they announced sales partnerships with two large distributors: Hologix (developer, manufacturer and supplier of premium diagnostic and surgical products) which will add them to their GYN and GYN Surgical line of products ($300mm line), and Arteriocyte, which will start selling J-Plasma to their network of plastic surgeons.

Given that Bovie’s sales force currently consists of a mere 16 employees and 30 independent sales reps, this should increase the reach significantly. The company said that the two agreements are going to expand their salesforce “by multiples”.

One thing I like about Bovie is that they have a small revenue base to grow from. In the second quarter revenue was $9.2 million. This is up from revenue of $7.2 million in the first quarter.

Even though J-Plasma revenue remains in its infancy, incremental growth is still quite accretive to the top line because of the simple math that comes along with the company not being very big.

So we will see how things go in the upcoming quarters. The one negative of note is when I model the growth out to next year, the company is still only borderline profitable after assuming a similar sales pace to the last couple of quarters. So we may be a ways away from a real earnings inflection. Nevertheless, I’m not sure that will matter much if J-Plasma sales can continue at the pace they are at. If they do, profitability is an eventual inevitability and that is what the market will focus on.

New Position: Hudson Technologies

In an unfortunate turn of events I was listening to the Hudson Technologies presentation at the ROTH conference (the presentation is no longer available but I could send a copy I made if someone wants it) on my bike ride home a few weeks ago. I was thinking wow, this sounds like a really interesting idea. So I get home, take a look at the chart and boom! The stock had jumped from like $3.50 to $5 that very day.

Sigh.

Nevertheless I continued to dig and found that in some ways the stock is actually a better idea now than it was pre-spike.

Hudson is the biggest refrigerant reclaimer in the United States. The stock jumped on July 18th (the day of my bike ride) because of the announcement of a contract with the department of Defence:

[Hudson] has been awarded, as prime contractor, a five-year contract including a five-year renewal option, by the United States Defense Logistics Agency (“DLA”) with an estimated maximum value over the term of the agreement of $400 million in sales to the Department of Defense. The fixed price contract is for the management and supply of refrigerants, compressed gases, cylinders and related items to US Military Commands and Installations, Federal civilian agencies and Foreign Militaries. Primary users include the US Army, Navy, Air Force, Marine Corps and Coast Guard.

So this is a big deal for a little company. But it wasn’t the primary reason I was looking at the stock. The story that intrigued me centered around their reclamation of R-22 refrigerant volumes.

R-22 refrigerant, also known as HCFC, is an ozone depleting substance, much like the CFC refrigerant that we all remember from the 1990s. In fact, R-22 took the place of CFC’s in many applications. But because R-22 also has an negative environmental impact it was decided by a number of governments t phase the refrigerant out. In the United States, between now and 2019, production of virgin R-22 will go to zero, as ruled on by the Environmental Protection Agency.

In October 2014, the EPA announced its final phasedown schedule regarding the production and importation of HCFC-22. The order called for an immediate drop from 51 million pounds allowed in 2014 to 22 million pounds in 2015, 18 million pounds in 2016, 13 million pounds in 2017, 9 million pounds in 2018, and 4 million pounds in 2019. No new or imported R-22 will be allowed in the U.S. on or after Jan. 1, 2020.

With R-22 production being phased out, the remaining source of R-22 will be from reclaimed refrigerant. This is where Hudson comes in as the largest reclaimer in the U.S. Hudson should benefit from the production restrictions as they gain market share as well as benefit from price.

Its price where things get really interesting. Over the time period where CFC’s were phased out the price spiked from $1 per lbs to $30 per lbs.

Already we are seeing the price rise. R-22 ended last year at $10/lbs (up from$7.50), it rose to $12/lbs in the second quarter and prices are currently at $15/lbs. The company said on their second quarter call saying they are “showing signs of further price improvement.”

Hudson benefits directly from the price rise. The company has said that they expect that for every $1/lbs rise in the price, 50c should fall as margin.

The opportunity won’t continue forever, but it appears to me that the runway will be measured in years. While new air conditioning units do not use R-22, the economics of repairs for existing units work in favor of R-22. At the Roth conference the company said the following:

…lets say you want to repair unit outside of your house, has 10lbs of refrigerant, repairs are $2,500, even if refrigerant is $100/lb its $1,000… [in comparison] new unit is going to cost you $8,000

Hudson has a market capitalization of around $165 million and there is about $30 million of debt. The company announced 15c EPS in the second quarter. Keep in mind that this number includes no impact from the department of Defense contract and that R-22 prices have risen another $3 in the third quarter.

I honestly thought the stock was going to take off after the second quarter. While it flew in after hours (and sucked me in for a few more shares) it gave up those gains the next day and actually traded down 10% in the in suing days.

It turns out that company executives sold a bunch of stock over that time. The company released a press release on the 10th saying that various executives had sold 1.1 million shares. That’s a lot of shares for a little company to absorb.

You could of course look at this negatively, but keep in mind that these say executives still hold 20%+ of the company, and so they sold down their positions by about 10%. They’ve waited a long time for some sort of pay day, its hard for me to put too much stock in them cashing in a bit once it comes.

I really like this idea.

It seems to me that R-22 prices have no where to go but up, that upwards trend has already affirmed itself, and the stock really isn’t reflecting this. Nor is it reflecting the full impact of the DoD contract, which should be worth around $40 million in annual revenue at similar to higher margins than the existing business right now. While the stock hasn’t really moved up from my original purchase price so I haven’t been adding much, the size on the high side of what I usually allocate to a new position.

New Position: Sientra

I honestly can’t remember how I came across Sientra. It was probably some sort of screen, but I have no recollection of what I was screening with. I’m not getting enough sleep.

At any rate, I came upon the stock the day before it released earnings, which forced me to do some quick work and decide whether I knew enough to take a position or not.

I took a position on that day only an hour before the close. I tweeted my thought in this tweet (as an aside I’ve decided to try to return to Twitter to comment on my portfolio adds. I feel like I am missing out on a level of feedback that was often useful).

I always wince when I make a decision like this; I’ve been bitten by acting too fast before. Yet what drove me to act quickly was because Sientra seemed like a time sensitive situation.

Here’s the scoop with Sientra. The company sells a breast implant. Their product was approved by the FDA in March 2012. By most accounts it is a better product than those that already on the market from Allergan and Johnson & Johnson. The company was taking market share and sales were increasing. In the first six months of 2015 sales were $26 million, up from $21 million in the comparable period the year before. In the third quarter sales were $13 million, up from $10 million in 2014. Unfortunately the results were overshadowed by manufacturing problems that led to the company taking a $3 million allowance for product returns and suspending further production of the impants.

A few weeks before they announced their 3rd quarterr results the company announced that on October 2nd they had “learned that Brazilian regulatory agencies announced that, as they continue to review the technical compliance related to Good Manufacturing Practices (GMP) of Silimed’s manufacturing facility.”

On October 9th Sientra released a letter that they had sent plastic surgeons regarding the issues with the facility. Sientra relied on a single source manufacturer. The compliance issue caused the company to put a voluntary hold on sales. The stock dropped from over $20 to $10.

Sientra did its best to come clean. They worked with the FDA and hired a third party firm to verify the safety of the product. The company was silent for two months and the stock continued to fall, eventually settling at $3 in December.

On January 8th, in a published letter to doctors, the company announced that they had “submitted all of the third testing data of its products to the FDA. He says that, in the company’s opinion, the results show that all are safe and present no significant risk to patients. If the FDA agrees, then their implants will be back on the market.”

The company said that while their investigation found that there were microscopic levels of particulate matter on the products, that data also revealed that even with well controlled manufacturing processes the presence of microscopic particles is unavoidable, and the level of particles from the shedding of a typical laboratory pad would have more particles than their products.

They started selling their implants again in March. The second quarter was their first full quarter of results. Along with the results the company provided an update on their search for a new manufacturing partner. As I had hoped, they announced a new partner.

Sientra has entered into a services agreement with Vesta, a Lubrizol LifeSciences company and a leading medical device contract manufacturer of silicone products and other medical devices…Under terms of the agreement, Vesta is establishing manufacturing capacity for Sientra and is working with the Company to finalize a long-term supply arrangement for its PMA-approved breast implants. Sientra anticipates that all project milestones will be achieved for the Company to submit a PMA Supplement to the FDA during the first quarter of 2017.

Sales in the second quarter were $6.2 million, which is only about half of the $14.2 million in sales they had the previous year, but still a very successful initial level considering their limited launch. In fact the company has to be very careful about how much product they sell before they get manufacturing back up and running. They do not want to risk another supply disruption.

The response to their return to the market has been positive. The reason I was so interested in getting into the stock sooner rather than later is because management gave a very positive review of how quickly customers were coming back. On the first quarter call by CEO Jeffrey Nugent:

We were removed from the market voluntarily and our primary competitors naturally came in and took over those customers that we were no longer able to serve. So what encourages us, and me particularly, is the relative speed and ease of converting those previous customers to come back from those products that they used as a replacement.

So, I could give you a number of other statistics. We have a very high level of analytics inside the Company. We know exactly who is ordering what. We’re following that on a very detailed basis. But as far as pushback, we’re not seeing much. There are virtually no concerns about the safety issues that were raised and we’ve been able to convince those customers that we have the confidence and are giving them the assurance that we are not going to allow them to go back on backorder.

So customers want the product and the market for growth is there. The breast implant market is large compared to the size of Sientra. I had to do some searching, and most of the numbers are behind expensively priced reports, but I was able to gather that the US implant market is at least $1 billion. Sientra had a revenue run rate of around $50 million before it ran into troubles. It seems that there is plenty of market share left to capture.

The one negative consideration is that this story isn’t going to play itself out in the next couple of months. The company remains supply constrained and are relying on inventory for sales. While the details about the manufacturing partner are great, its going to be a while before they are producing new product. The company said the fourth quarter of 2017, which I believe is probably conservative, but regardless new product is still some time off.

Nevertheless, with a positive response from customers and the path to new product clearing, I suspect we will see the stock move higher as we inch towards that date. My hope is that we eventually get the stock back to the $20 level, where it was before the roof caved in.

What I sold

I reduced my positions in Air Canada, Granite Oil and Intermap. Air Canada and Granite continue to be slow to develop. I did like what I read from Granite’s second quarter earnings release on Friday, and I may add to the position again in the coming days.

Air Canada just continues to lag regardless of what results they post. I’m keeping what amounts to a start position here, but after seeing the stock struggle for the better part of two years even as the business continues to improve, I just don’t know what it will take for a re-valuation to occur.

Intermap just keeps dragging along with no financing in place. I sold a little Intermap in the high 30’s but mostly decided to reduce after lackluster news along with the quarterly results released Friday.

In all three cases there is also the consideration that I have come across a number of new ideas as I discussed above and prefer to make room for them.

I also sold Iconix in mid-July but bought back my position before earnings. However, as I am want to do, I neglected to add back the position in my tracking portfolio and didn’t realize that I had not done so until I reviewed the positions this weekend. So I will add it back Monday morning.